A Small Business Owner’s Guide: The Complete Process of Hiring and Retaining Employees | Part One
Hiring Your First Employee
Getting an Employer Identification Number
As a small business owner, you probably never thought hiring employees would be something you had to worry about, but here you are, wondering what the first step is.
Before you can ever put an ad in the paper or a listing on a job site, you’ll need to apply for an Employer Tax ID number, also called an Employer Identification Number (EIN for short), from the United States Internal Revenue Service.
This EIN will be the number you use to report your employee’s tax information and all other documentation to the IRS and to state agencies as well. Waiting to file for a number after your employee has started working can be a paperwork nightmare.
You can obtain an EIN by mailing a completed Form SS-4 to the IRS, in which case you will receive your EIN in four to five weeks. Faxing the completed form will get your number a little sooner, in about two weeks. Finally, the IRS claims that you can get your EIN immediately by applying online.
You can find the Form SS-4 here.
Income tax withheld from employees’ wages
For a small business, you have to maintain records in order to track trends in your business, fill out your taxes easily, and prepare financial statements from time to time. From the beginning, set up a system for saving and storing documentation concerning your business, and you’ll always know just where to find what you need.
One example of documentation you’ll need to retain with new employees is tax information.
First, you will need a signed Form W-4 from each employee by the date they begin working. The IRS requires a Form W-4 form for each employee.
Next, keeping good records will make it easier to file your Form W-2 each year. This form reports to the federal government what you have paid out and withheld for each employee. W-2 forms must be mailed to employees by January 31 so they can complete their tax returns for the previous year, and they must send a copy to the Social Security Administration by the end of February.
Finally, your state will require you to withhold taxes as well. Click here to access specific information about each state.
Employment Eligibility Verification
The information on the I-9 form confirms the employee’s citizenship or eligibility to work legally in the United States. This is important documentation that will protect you, your business and your lawful employees.
An employee eligibility verification form, an I-9, must be completed within three days of hiring an employee. However, you do not have to submit the Form I-9 to the federal government.
You can simply register with E-Verify and then take the information provided by the employee on the I-9 and plug in online to verify an employee’s eligibility.
Click here to register for E-Verify. E-Verify has become increasingly popular over the last few years with both large and small businesses.
New Hire Reporting Requirements
As the employer, you must report hires or rehires to your individual state within 20 days.
You can report this information to your state by going to this page. States, in turn, can communicate with one another about employees who may have moved from one state to another. The federal government can access the information reported by any state, if necessary, without the employer ever having to submit the information to the federal government.
The New Hire Reporting System is maintained in order to keep up with parents who owe child support and make sure there are no discrepancies from state to state with welfare, food stamps or Medicaid.
Once you have done your part by reporting all new hires and rehires, the state and federal governments will have the information they need to ensure these court orders and systems are being upheld fairly.
Small Business Workers Compensation Insurance
No matter what size your business, you must provide workers’ compensation insurance for your employees. You may feel like workers’ compensation insurance is wasted money, but if you’re ever in a situation where it pays out benefits to an injured employee, you’ll understand its importance.
Workers’ compensation has two facets. First, it protects employees who may get hurt at work. The insurance provides benefits to employees even if the injury was the result of their own actions. Second, it protects the employer by ensuring that they aren’t sued unlawfully or expected to meet unreasonable requests.
Each state and the federal government has its own standards and rates for workers’ compensation, so you’ll need to check with the U.S. Department of Labor to find out what your state requires.
Workers’ compensation insurance can be purchased through many different commercial agencies, so shop around for the best price.
Workplace Posters Detailing Federal and Applicable State Labor Laws
If you decide to hire even one employee, you will be required to post notices about certain topics by both the federal and state governments. Federal regulations include posters about Job Safety and Health Protection, Equal Employment Opportunity is the Law, and the Fair Labor Standards Act.
Some posters are required regardless of the business type, while others are specific to the kind of work you do. There are hefty fees for not having some of these posters visible to employees. Employees have the right to be informed about laws that are in place for their benefit. They also must know whom they should contact if they feel those laws are being broken by their employer (you).
State regulations vary as to which posters must be displayed. These can be found on each state’s department of labor website, and they can usually be downloaded and printed for free.
Employer’s Quarterly Federal Tax Return
If you have never had an employee other than yourself, you’ve never had to deal with paying wages and withholding taxes, Medicare and Social Security. Now that you’re hiring someone, you’ll have to be responsible for these things. Not only does your income depend on your ability to do these things properly, but your employees’ income does, too.
The first thing you’ll have to do is file quarterly tax returns with the federal Internal Revenue Service’s Form 941. While some small business owners hire an accountant to keep up with these quarterly documents and fees, it’s entirely possible to do it on your own.
The IRS has put together an Employer’s Tax Guide (available here in PDF format) to help you navigate the federal tax laws. Additionally, you can visit your state’s Department of Revenue for information about withholding taxes at the state level.
Employee Record Keeping Requirements
We already stressed the importance of maintaining good records when it comes to taxes, but there are many other areas where recordkeeping is vital.
You’ll need to preserve records to prove that you are paying mandatory minimum wages, that you have compensated your employees for overtime worked, and that all of your employees are of age or are being employed fairly based on their age.
Keeping these records accurate and up-to-date can save you from being sued by an employee or noticing an error and having to fix it yourself down the road. There are several places where you can find information about recordkeeping, like this page on the IRS’s official site.
When you are getting a small business off the ground, it’s a good idea to set aside an area in a filing cabinet or other system for each record that you must keep. This allows for easy access whenever you need these documents.
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